Think Twice HR and an Rx for the Bottom Line

The next time you think that HR doesn't affect company profits, or that you can't put a dollar figure on such abstract concepts as recruiting and retaining, think about drugs.

Prescription drugs, that is. If you live in the eastern United States, you're aware of the ubiquitous presence of CVS drugstores. The company dispensed 300 million prescriptions in 2000 and expected to make $20 billion in revenues this year.

Expected. That's the key word. As it turns out, CVS probably won't hit the mark. Its second-quarter earnings were four cents per share below what analysts had expected. The company's stock price dropped more than 18 percent in one day after it released figures showing millions of dollars in money that didn't come in.

What, you say? Isn't health care one of the most consistent sectors in the American economy? Aren't drugs about the last thing people would cut back on during an economic slowdown?

Yes. But CVS's problem isn't a lack of customers; it's coping with a lack of employees. This summer, the company was short 650 to 700 pharmacists a day. The worst shortages were in Washington, D.C., Connecticut, Michigan, and Ohio. The problem was so severe that the company had to hang a "closed" sign on counters at various times of the day.

Mark Husson, vice president of Merrill Lynch, said in a recent analysis of the company that CVS's inability to hire and retain enough employees directly affected revenues. He said the shortage has resulted in closed pharmacies, alienated customers, and the added expense of having to woo back employees who have jumped ship.

Friends, if you're looking for an independent voice to tell your CEO how important HR is, look no further. Merrill Lynch isn't an HR publication, an HR association, or an HR department. Its goal isn't to cheerlead for HR, but to manage $1.6 trillion in assets.

In the contest for drugstore profits, the companies with the best recruiting and retention programs will be the winners. Walgreens, for example, hasn't had nearly as much trouble coping with the labor shortage as CVS has.

A Walgreens spokesperson, Carol Hively, says the company developed a proprietary workflow technology (called Intercom Plus) that makes pharmacists' lives easier. The system moves a lot of the administrative work -- verifying the accuracy of prescriptions, for example -- to technicians. This, she says, frees up pharmacists to spend more time talking with patients. It's a point that Walgreens uses in recruitment letters to employees of CVS and other competitors.

Walgreens also is known for paying well and offering generous options. Hively says that the company also gives pharmacists a lot of opportunities for promotion to corporate positions.

CVS is successfully fighting back. The firm rushed to hire a new crop of pharmacists, with good salaries and stock packages. Already, it's paying off. The company's staffing problems have been reduced. And mutual funds like the Touchstone Value Plus Fund are buying up CVS's stock while it's cheap.

One snag: In late August, CVS was slapped with a class-action suit, alleging that it failed to tell shareholders that it "was unable to successfully address the national shortage of pharmacists."

The short-term fixes help, but the longer-term problem remains. Between 2000 and 2005, the supply of community pharmacists is expected to increase only 4.5 percent. At the same time, there will be a 29 percent increase in the number of prescriptions to be filled.

Possible solutions include building more pharmacy schools and educating more teenagers about jobs in the field. U.S. Congressman Mike Simpson, an Idaho Republican, is pushing a bill to forgive loans for pharmacists serving in areas of need. "We have bipartisan support, so I think it has a real chance of passing this Congress," he says.

Meanwhile, it's a contest between companies. The winner is the one that can hire and hold on to the limited number of available pharmacists, thus retaining the most customers.

"The transcendent lesson from CVS is that hiring decisions have profound consequences on company performance," says Jan Bryant Howroyd, chairman and CEO of Act • 1 Group, an employment agency. "That seems obvious on its face, but CEOs too often tend to regard hiring decisions in isolation."

If it's not obvious to your CEO, just mention the "closed" signs that were hanging over CVS counters this year when customers came in to fill their prescriptions.